[Column] Lana Jacobs: Shipping industry can gain from smart contracts

International shipping could be among the first industries to embrace the commercial benefits of blockchain-based smart contracts.

It takes an average of 30 people and 200 pieces of communication to get one consignment of cargo from A to B. The cost of processing and administering all this documentation is estimated to be up to one-fifth of the actual transportation costs.

The shipping industry is crying out for a more efficient and cost-effective solution, and smart contracts could be what is needed to end the paper jam.

One of the documents in the shipping chain which may be in line for development is the bill of lading. These documents have three main commercial functions: they are used to sell the cargo, to finance the purchase of the cargo by letters of credit, and to release the cargo at the receiving port.

The difficulty is that copies of bills of lading are seldom accepted. The norm is to insist on original documents, which are then passed from hand to hand, or at least couriered, as the cargo makes its way across the seas.

A question of trust and transparency

At the root of all this inefficiency is trust, or rather the lack of it, which is not surprising given the value of modern cargoes and the multiplicity of parties in the shipping supply chain, including exporters, importers, carriers, customs and ports authorities, along with various other third parties and middlemen.

Indeed this is why parties buying, financing and delivering cargo generally insist on seeing the original bill of lading. But even original bills of lading are vulnerable to theft and manipulation and, on top of that, can be lost (with potentially disastrous consequences).

Smart contracts, on the other hand, allow many parties who do not necessarily know or trust each other to transact, secure in the knowledge that no one can intervene or interfere with the transaction.

Trust and transparency are inherent in smart contracts because of the nature of blockchain, on which they are based. A blockchain is a distributed data structure where every data block is replicated and shared across the network.

Each block is timestamped and appended to the network in chronological order and automatically validated through a consensus mechanism in which everyone on the network participates.

This means an audit trail is automatically recorded across the network; no third party is needed to execute or verify a transaction, and changes can be detected and prevented. In short, blockchain transactions are tamperproof and everything on the network is visible to everyone else.

This is not to say that blockchain-based transactions are completely risk-free. There are risks, of course, the main one being related to the fact that blockchain networks are data driven. The data source and the inputting of the data at the source are crucial to ensure quality and integrity at the outset.

Sea change for big players

In the shipping industry, paper bills of lading are still the norm, despite a number of attempts to introduce electronic bills of lading. These attempts are believed to have failed mainly because they lacked the level of transparency that was not possible until the advent of blockchain.

The possibilities of using blockchain to revolutionise the administration of the shipping industry and international trade are being actively explored. Danish shipping operator Maersk has joined forces with computing giant IBM to pioneer and test a cross-border supply chain solution on blockchain.

Such a system could significantly reduce delays and fraud in cargo shipping and potentially save billions of dollars worldwide, according to IBM.

Another positive sign of change was the United Nations Commission on International Trade Law’s (UNCITRAL) adoption in July 2017 of the Model Law on Electronic Transferable Records. UNCITRAL says the adoption of the law “clearly indicates that the international trade community recognises and endorses the path to paperless trade”.

The shipping industry, known for being slow to change, could well be the first industry to take smart contracts on board and demonstrate the potential of blockchain for all the world to see.